1. You need to estimate the equity beta for Golden Clothiers, Inc. Golden's debt-to-equity ratio is 85%, which is higher than a typical firm in its industry. The following table shows the levered equity betas and debt-to-equity ratios for three comparable chemical firms. Assume the tax rate is 40%.
| Company |
Levered Beta |
D/E ratio |
| TJ Maxx |
1.68 |
0.25 |
| New York & Co. |
2.14 |
0.16 |
| Express, Inc. |
1.23 |
0.28 |
a. Assuming debt is risk-free, use the information given above to estimate the unlevered equity betas of each of these companies.
b. What is your estimate of Golden Clothiers' levered equity beta?
c. If T-Bills are yielding 1.8% and the return on the market is 9.3%, what is the required return on Golden Clothiers' stock, according to the CAPM?
d. Golden has 5-year maturity bonds outstanding with a par value of $1,000 that pay annual coupons of 5%. These bonds are currently selling for $982. What is Golden's required return on debt?
e. If Golden has no preferred stock outstanding, their debt-to-equity ratio of 85% is expected to remain constant going forward, and their marginal tax rate is 40%, what is their weighted average cost of capital?